Business and management

Spain’s bad bank

Conflict of interest

SPAIN does not find Beppe Grillo funny. The comedian’s strong showing in this week’s Italian election helped set the scene not just for prolonged political uncertainty there, but for renewed jitters about other peripheral economies. The Spanish government’s official response is simple: it is making good progress on reform, and nowhere more so than sorting out its troubled banks.

Today the country’s bad bank, Sareb, is due to receive risky property assets valued at €15 billion from a group of partially nationalised lenders—Banco Mare Nostrum, Liberbank, Caja 3 and Ceiss. Sareb is already the owner of €37 billion of dud property loans and foreclosed assets from four fully nationalised lenders—NCG Banco, CatalunyaCaixam, Banco de Valencia and Bankia, which this morning reported a €19.2 billion loss for 2012. By ensuring that banks are not exposed to further losses from these assets, the Sareb deal should enable the sector to return to health more quickly.

That’s the theory, anyway. In practice, the banks will still have a lot on their plate with the assets they still hold. The Spanish economy has contracted for five quarters in a row and is expected to contract this year as well: despite taking very big provisions in 2012, there is always a risk that more will be needed. And although Sareb has a 15-year lifespan in which to sell off assets, there are fears that it will start peddling them as soon as a thorough assessment of its portfolio is finished. Lenders fret that would bring down the prices of property loans they still hold on their balance-sheets. Santander, for instance, sold over 50% more properties in 2012 than in the previous year; it has said it plans to keep reducing its real-estate risk by selling properties before Sareb really gets going.

Insiders at the bad bank insist that they will not offload assets quickly. They argue that most of the assets Sareb holds are not actual properties, but loans. But loans can be called in. On February 19th Reyal Urbis, a property developer, filed for insolvency after failing to renegotiate €3.6 billion of debt with its creditors, the second-biggest bankruptcy in Spain’s history. One of its creditors was Sareb. The bad bank also has financial obligations to meet during its 15-year existence: on February 26th it issued €14 billion of debt to fund the purchases it is making.

Make no mistake: the bad bank is a good idea. Spain’s banking system needs to put worries about its solvency behind it if the sovereign is to quell concerns about its debt burden and if lenders themselves are to start extending credit, particularly to small and medium-sized enterprises. But to be effective, Sareb must also be patient.